Empowering supply chain energy efficiency: Merits and pitfalls of buyer collaboration

Abstract

Government environmental agencies are increasingly partnering with large, foreign corporate buyers in the energy efficiency improvement process to encourage investments at small manufacturers that can enhance the value of local manufacturing. Using a stylized supply chain model, we show that while buyer collaboration enhances energy efficiency investments, its impact on the value of local manufacturing varies. Specifically, buyer collaboration improves the value of local manufacturing only when both the cost of the buyer’s outside sourcing option and the environmental impact of energy are either high or low. In cases where one factor is high and the other is low, buyer collaboration reduces the value of local manufacturing. Moreover, we find that the higher penetration of renewable sources in the energy mix can either amplify or mitigate the beneficial impact of buyer collaboration. When the manufacturer is more competitive in the global market, a greener energy mix can negate the beneficial impacts of buyer collaboration on the value of local manufacturing. Our study provides valuable insights for designing environmental initiatives and policies to boost both energy efficiency and local manufacturing, underscoring the importance of supply chain interactions in synchronizing climate change policies.